The Basics of Yield Management

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The Basics of Yield Management
Sheryl E. Kimes
Cornell University, [email protected]
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The Basics of Yield Management
Abstract
Yield-management systems have boosted revenue at many properties, but these electronic tools are not always
compatible with the operating atmosphere of a hotel. If you want to introduce yield management at your
property, you may need to make some changes first.
Keywords
hotel industry, yield management, revenue management
Disciplines
Hospitality Administration and Management
Comments
Required Publisher Statement
© Cornell University. Reprinted with permission. All rights reserved.
This article or chapter is available at The Scholarly Commons: http://scholarship.sha.cornell.edu/articles/456
The Basics of
Yield Management
Yield-management systems have boosted revenue at many properties, but these electronic
tools are not always compatible with the operating atmosphere o f a hotel. If you want to
introduce yield management at your property, you may need to make some changes first
by Sheryl E. Kimes
YIELD MANAGEMENT is becoming part of the standard operating procedure for many hotels
with sophisticated electronic property-management systems. Appropriately tailored to the hotels they
serve, yield-management systems
generally increase revenue and
take much of the guesswork out of
rooms-management decisions.
However, installing a yield-management system can create problems if management does not lay
the proper groundwork. This article addresses the issues operators
should consider in determining
whether yield management is right
for their property and discusses
Sheryl E, Kimes is an assistant professor of quantitative methods at the
School of Hotel Administration at Cornell University. She has a Ph.D. in operations managementfrom the University of Texas—Austin.
14
T H F r O R M F I I H R A O l iA R T F R I Y
some of the measures managers
should take to pave the way for successful adoption of such systems.
What is Yield Management?
Basically, yield management is the
process of allocating the right type
of capacity to the right kind of customer at the right price so as to
maximize revenue or yield. In the
case of hotels, yield management is
concerned with the number of
rooms that should be sold at various rate levels. Obviously, a tradeoff exists. The manager would prefer to sell all rooms at the highest
rate possible, but since this rarely is
feasible, following this policy may
lead to empty rooms and lost revenue. Conversely, if a hotel fills its
rooms with low-price customers,
the revenue that could have been
obtained from higher rates will be
lost. The objective of yield management, then, is to define what these
trade-offs should be. How many
rooms should be allocated to and
protected for each market segment
over time?
Or kin1defined the yield statistic
as the occupancy rate multiplied by
the rate efficiency. The rate efficiency is the average room rate divided by the maximum room rate.
As he points out, hotel managers
need to be concerned with maximizing yield, or revenue, rather
than focusing only on a high occupancy rate or a high average room
rate. Another definition of yield
management, borrowed from the
airline industry, is maximizing revenue (or yield) per available room.
This may be a more appropriate
definition because of the difficulty
in defining the maximum room
rate.
Yield management consists of
two separate but related parts:
room-inventory management and
pricing. The inventory-manage!Eric B. Orkin, “Boosting Your Bottom Line
with Yield Management ” The Cornell Hotel and Restaurant Administration Quarterly, 28, No. 4 (February 1988), pp. 5 2 -5 6 .
N O V E M B E R 1M Q
ment process deals with how different types of rooms are to be allocated to demand. The pricing
procedure is more concerned with
the best prices to charge in different situations. In this article, I will
concentrate primarily on the roominventory component of yield
management.
Where Does Yield
Management Work?
The airline industry is considered
the birthplace of yield management. After deregulation in the late
1970s, airline competition increased, and the airlines tried to
operate their planes as efficiently as
possible. Yield management was
one of the methods developed as a
way of increasing competitive advantage and increasing revenue. In
airlines, yield management is concerned with selling the right seat to
the right customer at the right
price so as to maximize yield.
The airline and hotel industries
have several characteristics in common that make them ideal candidates for yield-management systems. Both have relatively fixed
capacities. Once an airplane has
been purchased or a hotel has been
built, it is rather difficult and expensive to increase capacity. The
idea, then, is to use your capacity in
the best (most profitable) way
possible.
Yield-management techniques
are appropriate when a firm is operating with a relatively fixed capacity, when demand can be segmented into clearly identified
partitions, when inventory is perishable, when the product is sold
well in advance, when demand fluctuates substantially, and when marginal sales costs are low but marginal production costs are high.
Ability to segment markets. For
a yield-management program to be
effective, the firm must be able to
segment its market into different
types of customers. For example,
For a yield-management
program to be effective, the
firm must be able to segment
its market into different types
of customers.
EXHIBIT 1
Typical individual-sales booking curve
Rooms sold
Days before
This booking pattern is typical of business-class hotels that cater to individual business travelers. Occasionally, business travelers book in
advance in anticipation of an upcoming meeting or conference. But it’s more common for business travelers to book a hotel room immediately
before a trip, either because the trip itself was scheduled on short notice in response to a specific need or because busy executives hesitate to
book ahead, not knowing if something more pressing might interfere with travel plans. When a hotel’s booking pattern approximates this curve,
the yield-management system will discourage early bookings at lower rates and advise management to keep rooms available at higher, latebooking rates for the predictable high volume of last-minute reservations.
business and pleasure travelers can
be split easily into separate groups.
The basic idea is that hotel managers will have different marketing
plans for the different types of customers. Hoteliers would like to be
able to sell these segments rooms
that best fit their needs. In the case
of pleasure travelers, lower-priced
rooms that must be booked a certain length of time ahead may be
most appropriate. With business
travelers, higher-priced rooms that
have no time penalty may work best.
Perishable inventory. Clearly,
hotel rooms are a perishable inventory item. If the room is not sold
one night, that room-night is lost
forever, and the hotel manager cannot put it into inventory for use at
some other time. Airlines and
rental-car firms face similar
problems.
Product sold in advance. Some
transient hotels sell most of their
rooms a few days in advance, but in
some situations, reservations are
made well in advance of the day desired. In the case of group sales,
reservations may be made several
years in advance. When the product is sold in advance, the manager
is faced with uncertainty. Should a
group that wants to pay a low rate
be accepted, or should the manager
wait to see if higher-paying cus-
tomers will appear? How many super-saver rooms should be sold?
Might someone who would pay a
higher rate want to reserve those
same rooms? With a good yieldmanagement system, these types of
questions can be answered.
Fluctuating demand. Hotels face
widely fluctuating demand patterns. Demand varies by season of
the year, by day of the month, and
by time of the week. Yield management can be used to help temper
some of the demand fluctuations by
helping to increase occupancy during slow times (by decreasing price)
and by increasing revenue during
busy times (by increasing price). If
T H F r O R M F I I H P A O IJ A R T F R I Y
EXHIBIT 2
Typical group-business booking curve
Rooms sold
Days before
Unlike individual business travelers, groups generally make travel plans in advance to ensure that a hotel will have a sufficient number of rooms
available to accommodate them. This booking pattern, typical of a hotel that caters to groups, shows that the hotel reserves over 70 percent of its
rooms a month or more in advance. By three weeks before a given date, the hotel has generally sold all but a handful of the rooms it will be able
to sell for that date. When a hotel’s booking history approximates this curve, the yield-management system will recommend accepting group
reservations well in advance at appropriate group rates.
a manager knows when demand
peaks and valleys are going to occur, he or she will be better able to
plan for them.
Low marginal sales costs. Once
a certain number of rooms are
sold, it does not cost much more to
sell another room. The hotel and
staff are already in place, and one
more room does not make much of
a difference in terms of cost.
High marginal production
costs. Conversely, hotels face high
marginal production costs. For example, if a property is full and a
customer wants a room, another
room cannot easily be added onto
the property because of the large
N O V P M R P R -IQftQ
fixed cost. Hotels add capacity only
in large chunks and only after demand patterns have been carefully
studied.
Requirements of a YieldManagement System
Many different types of yield-management systems exist, but most require the same sort of information.
The hotel must know the pattern in
which customers book reservations,
must have good information on demand patterns by market segment,
must have a defined overbooking
policy, and must have an idea of the
effect of changing price on demand. Obviously, the hotel needs a
17
good information system that
keeps the data easily accessible.
Booking patterns. Most yieldmanagement systems require information on how reservations are
made for a particular day. For example, if the manager starts to look
at a particular night three months
in advance, how many reservations
come in for each market segment
each day? Exhibit 1 shows a hotel in
which reservations are made near
the day of arrival, while Exhibit 2
shows a more group-based hotel in
which reservations are generally
made long before the day of arrival. The yield-management system uses this information to help
Top management cannot
assume that yield
management will just
“happen”; it requires careful
planning and training.
track how you are doing compared
to how you should be doing.
Demand patterns by market
segment. To operate any yieldmanagement system, a hotel must
have historical demand information available by market segment.
This information must also be broken down by time of the year and
day of the week. For example, how
many concierge rooms are usually
sold on Tuesday nights in the summer? How much does this usually
vary? These historical data are
used to build forecasts for each of
the market segments. The demand
forecast is one of the building
blocks of yield management. Without it, the yield-management system cannot function properly.
Overbooking policy. Most hotels
have some sort of overbooking policy. With a yield-management system, the overbooking policy should
be clearly stated. The level at which
management is willing to overbook
should be built into the yield-management system.
Effect of price changes. The
manager should have an idea of
how changing price will affect the
demand for a particular class of
rooms. Airlines change prices several thousand times a day in response to competitive pressures.
Clearly, this level of sophistication is
beyond that required for the average hotel operator, but still, the
manager needs to be aware of competitive prices and what effect a
price change will have on demand.
Good information system. To
obtain all of the information listed
above, the hotel must have an excellent information system. If the hotel is part of a central reservation
system, the property-management
system and the central reservation
system must be integrated. In this
way, as reservations are received
and room availability changes, both
reservation systems will be aware
of the latest information. Failure to
have this type of reservation system
could lead to many problems, including selling rooms at too low a
price or not being aware of the
availability of certain types of
rooms.
Specific Problems with
Hotel Yield Management
Yield-management techniques developed in the airline industry are
not always applicable to the hotel
industry. Yield-management systems for hotels need to address the
problems of multiple-night stays,
the multiplier effect of rooms on
other hotel functions (such as food
and beverage), the booking lead
times for various types of rooms,
the lack of a distinct rate structure,
and decentralized information
systems.
Multiple-night stays. Airline
yield-management systems must
deal with different flight legs
within a hub-and-spoke system,
while hotels must deal with guests
staying over multiple nights. If a
guest wants to arrive on a low-demand day and stay through several
high-demand days, what rate
should be quoted? Clearly, the
manager would like to sell the room
on the low-demand day, but could
the hotel obtain a higher price on
the high-demand days? These
trade-offs need to be addressed by
the yield-management system.
Multiplier effect. Rooms are
certainly not the only thing sold in
a hotel. Restaurants, convention
space, and other services may contribute substantially to a hotel’s
profitability. By concentrating only
on the rooms function of a hotel,
the yield-management system
could be ignoring revenue opportunities in other portions of the hotel. Fortunately, this added function
could be built into a yield-management system.
Booking lead time. Because
some customers, most notably
T H E n O R M F I I H R A O IIA R T F R I Y
groups, book far in advance, the
manager must determine how
large a lead time needs to be studied for each day of hotel operation.
Should the group business be
treated as part of the yield-management system, or should it be
treated as a separate entity? How
long a lead time should be
considered?
Lack of distinct rates. Currently,
most hotels do not have as distinct a
set of rates as do airlines. With the
adoption of a yield-management
system, hotels should consider developing a firmer and more diverse
set of rates. By so doing, they will
get more benefits out of their yieldmanagement systems.
Decentralized information. As
mentioned above, a good information system is essential to a yieldmanagement program. Some
means of combining property information with central-reservations
information must be built into the
system, or the yield-management
program could generate erroneous
suggestions.
Managerial Concerns
Very little has been written on the
managerial implications associated
with yield management. Using yield
management may give a hotel
company a competitive edge, but
it could also result in alienated
customers and severe employeemorale problems. In addition, effective use of a yield-management
system requires intensive employee
training. As with any new approach to business, a firm commitment from top management is
essential.
Alienating customers. Consumers seem to be resigned to the fact
that airlines charge different prices
depending on how far ahead a
ticket was bought and what restrictions were met, but will hotel customers accept this pricing method?
The airline industry comprises a
small number of major competitors, and customers seldom have
much choice. Hotels, on the other
hand, have numerous competitors.
If customers don’t like having to
pay different prices for the same
room, they may decide to patronize
the competition. Likewise, customers may believe it’s unfair to pay a
higher price for a room than someone would who reserved it a few
weeks earlier. Hoteliers may face a
customer-education problem.
Employee-morale problems.
Yield-management systems take
much of the guesswork out of how
many rooms to sell at what price,
but they also take some of the judgment responsibilities out of reservationists’ and front-desk workers’
jobs. If a yield-management system
is not structured to allow workers
some latitude to use their judgment, the people who have to use it
might grow to resent the system.
Incentive and reward systems.
Yield-management systems could
also cause a problem for groupsales departments. Typically, salespeople in such departments are rewarded by the amount of sales they
make. But a yield-management system might indicate that it is not
beneficial for the hotel to accept a
group sale at a low room rate for
the time in question because that
block of rooms could be sold at a
higher rate. Unless incentive systems are changed, group-sales
workers might find that yield-management recommendations work
against them.
Similarly, managers are often rewarded on the basis of occupancy
or average room rate. With a yieldmanagement system, the manager
needs to be concerned with both of
these factors. Unless the incentive
system is changed to reflect this,
managers may resent using yield
management.
Employee training. As with any
new system, a yield-management
system will require extensive training of all employees. The employees must clearly understand the
purpose of yield management, essentially how it works, and how it
affects their jobs. Top management
cannot assume that yield management will just “happen”; it requires
careful planning and training.
Organization of yield-management function. Clearly, with independent hotels, a yield-management system must be located at the
property level. Because of the decentralized nature of most hotel
chains, yield-management systems
are often best located at the property level but need to be tied into
the central reservation system.
In terms of what hotel department should be responsible for the
yield-management system, arguments for several departments
(sales, operations, reservations)
could be made. Ideally, all areas of
the hotel will be involved with the
yield-management program. Only
when this occurs will the program
be truly successful.
Top management commitment.
Without a commitment from top
management, yield-management
systems may be doomed to failure.
Unless all employees know that the
yield-management system is considered essential to the success of the
company, they may be inclined to
treat it less seriously than top management feels they should.
Companies using yield-management systems report a substantial
increase in revenue with a minimum amount of investment. For a
yield-management system to work,
the hotel manager must have a
strong commitment to it, have the
necessary data, and have a strong
information system. He or she
needs to be fully aware of the managerial implications associated with
a yield-management system and
should be in a position to make any
necessary adjustments. □